Incremental Savings of a Subvention Program

Major Manufacturer (MM): Incremental Savings of a Subvention Program

Brief Overview

It has become standard practice for manufacturers to provide part of their profits to a Captive Finance Company (CFC) so they may offer special rates such as 0% interest, commonly referred to as subvention. This cost is less than the amount of a discount a manufacturer would have to give to stimulate an equivalent amount of sales. This type of incentive has had a substantial impact on volume at both the manufacturer and the CFC.

 

Situation

MM did not think it was fair that it was being charged such a high price by its CFC for implementation of subvention programs because at some point the incremental cost to the CFC were reduced down to their variable cost.

 

Why Goff Associates, Inc. (GAI)?

GAI has substantial expertise in analysis of complex profit analysis problems, particularly in the analysis of per unit profitability and the split between fixed and variable cost.

 

Results

GAI performed a study of the incremental impact subvention programs had on volume. This was done my establishing a base line from historical volume patterns. GAI then analyzed the impact of differing amounts of subvention on CFC’s volume. As suspected, reductions in rate had an exponential impact on CFC’s volume. GAI then modified the per unit pricing models CFC used by inserting an algorithm into the system that modified the fixed costs when calculating profitability based on the amount of incrementality. GAI also established a methodology for determining what percentage of incrementality should be used based on the results of its pervious analysis.

 

Once the new tools were put in place, CFC was able to reduce the cost per unit to the MM depending upon the amount of support provided. Since MM had a fixed marketing budget, this resulted in the MM being able to expand their program which again led to additional incremental sales for the MM and CFC.

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